Canadian investors have traditionally displayed a strong “home bias” by heavily concentrating their investments in Canadian assets such as real estate, domestic stocks, and Canadian currency. However, this approach limits diversification and exposes a portfolio to country-specific risks. By expanding one’s investment horizons to include foreign assets, particularly in sectors like technology, healthcare, and consumer, investors can reduce risk, gain exposure to global opportunities, and potentially earn higher returns.

Diversifying Across Sectors and Geographies

Comparing the sector composition of the S&P 500 and the TSX below, it becomes evident that the Canadian market is heavily concentrated in financials (30.1%) and resources (Energy 16.6% + Materials 11.9%), with limited representation in technology and healthcare. On the other hand, the S&P 500 offers a more balanced mix of sectors, with technology (28%) and healthcare (13.7%) at the forefront. By diversifying internationally, investors can tap into investable trends that are underrepresented in the Canadian market while accessing sectors with different growth profiles.

Mitigating Risk and Unleashing Opportunities

Diversifying away from Canadian investments reduces vulnerability to country-specific economic conditions, regulatory changes, and geopolitical events. A well-diversified portfolio spreads investments across different markets, sectors, and currencies, providing further stability and potential growth even during challenging times.

Foreign Currency Risk

Concerns about foreign currency exposure have held some investors back. It is crucial to understand that foreign currencies, such as the US dollar, contribute towards diversification and offers additional potential returns. While exchange rates can be volatile, a rising foreign currency will enhance your overall returns. There are alternative solutions to minimize currency impact for those investors who prefer not to have their portfolio influenced by foreign exchange. An example would be global and US mutual funds and ETFs with a “Canadian dollar-hedged” version. These vehicles provide exposure to foreign assets while mitigating the risk associated with fluctuations in foreign currencies.

Building a well-diversified portfolio that includes foreign investments allows investors to access international sectors and opportunities while mitigating the overall risk. If you would like help diversifying your portfolio and enhancing potential returns, please reach out to one of our team members.